EXCLUSIVE: PIMCO CEO Mohamed El-Erian on the Fiscal Cliff

We're three weeks away from the fiscal cliff -- a $600 billion combination of tax hikes and spending cuts Congress and the president are trying to avoid.

Last week, I sat down with Mohamed El-Erian, CEO and co-CIO of PIMCO, one of the largest money managers in the world.

Here's what he had to say about the cliff (transcript below).

Mohamed El-Erian: "So the situation is an illustration of how dysfunctional our politics have become and how it impacts the economy. So think of the original idea of the fiscal cliff. It was, if we threaten catastrophe, then our politicians will get their act together. And "catastrophe" for me is defined as throwing this economy into recession, which is what the fiscal cliff would do. And we can ill afford a recession, given how high unemployment already is, given how sluggish the economy is.

So the idea was threaten something really bad to get something good. But had our politicians consulted game theorists, people who actually look at how these things work, know that it's a really bad idea. Because in order for this strategy to work, you need one of two things. Either you need mutual trust so that both sides realize that they don't want to go over the cliff, and the better alternative is to trust each other. Our political system is such that people do not trust each other. Or alternatively, you assume someone can force an outcome that makes sense, but we don't have that right now.

So the result is that what seemed like a good idea a year and a half ago is now threatening the country, has caused major uncertainty, is delaying investment and whatever is agreed to, and we think something will be agreed to, whatever is agreed to will make the next agreement even more difficult because this one will be so bitter. So I would just say the fiscal cliff is yet another illustration of the need to get our politics sorted out.

So we are kicking the can down the road on three issues. One is too much debt, that at some point, not immediately, but at some point we've got to contain. Two is too little growth and too much unemployment, which we urgently need to deal with and, three is too much income and wealth inequality. Every time we face a decision to do something to sort out these three problems, we find out that it's too hard and we kick the can down the road.

There's a reason for that. First, it's the wrong generation that makes this decision. It's basically my generation, which we collectively have overborrowed, didn't invest enough in our infrastructure and our people, and, as a result, are going to leave my children's generation with too much debt and too little growth. And we're not willing to sacrifice now and therefore the political process, which responds to the people who elect representatives, gets totally paralyzed."

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By his use of the word "trust" I don't think he means "trusting the other side to do the right thing".

He means, "trusting" that the other side will act based on their survival instincts, to prevent catastrophy. It's just like the brinkmanship and mutually assured destruction of the cold war.

The fiscal cliff was not such a bad idea in theory. But, clearly the idea has failed. Even if they reach a last-minute deal, I'm sure it will be a terrible deal.

I think the problem was that the consequences of failing to reach a compromise were not catastrophic enough. They should have included shutting down the internet as part of the fiscal cliff, or a nationwide ban on NFL football and beer. Then they would've gotten something done for sure.